BEST VIEW MEDICAL CO LTD v. RICHERMEN INTERNATIONAL INVESTMENTS LTD

DCCJ 1080/2015

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1080 OF 2015

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DECISION

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Introduction

1.  This is the Defendant’s application for leave to appeal against my judgment handed down on 10 February 2017, in which I allowed the Plaintiff’s claim of refund of deposit of HK$381,800 and HK$20,000 and dismissed the Defendant’s counterclaim.  In the draft notice of appeal prepared for its application, the Defendant set out two grounds of appeal, namely:-

(1)   Ground 1: That I erred in finding that the air-conditioning system and the fire services system in the Premises were in the exclusive possession of the Plaintiff.  Under this Ground, the Defendant set out six points, which I shall deal with below.

(2)   Ground 2: Alternatively, that even if the air-conditioning system and the fire services system in the Premises were in the exclusive possession of the Plaintiff, I erred in holding that the Defendant’s demand for a non-refundable reinstatement charges in respect of the Plaintiff’s proposed renovation works would have automatically constituted a breach of the implied terms of the Tenancy Agreement.  Under this Ground, the Defendant set out also six points, which I shall deal with below.

2.  The test for determining whether or not to grant leave to appeal is trite.  I must be satisfied that the applicant would have real prospects of success in the appeal or that there is some other reason in the interests of justice that the appeal should be heard.  Bearing this test in mind, I shall now deal with the two Grounds and the points made thereunder one by one.

Ground 1

3.  Points (1) and (2) under Ground 1 are interlinked.  Mr Ho repeated his argument made at the closing submissions that paragraph 11 of Schedule 1 to the Building Management Ordinance (Cap 344) (the “BMO”) should serve as a starting point to interpret the Tenancy Agreement.  Paragraph 11 provided, inter alia, that the following are common parts:-

“Fixtures situated in a flat which are used in connexion with the enjoyment of any other flat or other portion of the building.” (emphasis added)

I have no problem with this “starting point” approach.  Indeed, this was the very approach I took in paragraph 34 of my judgment.

4.  Point (3) under Ground 1 is that given the uncontroverted evidence that the air-conditioning system and the fire services system in the Premises form part of a centralised system, and hence their operation would affect the entire systems for the Building, the air-conditioning system and the fire services system in the Premises would form common parts by paragraph 11 of Schedule 1 to the BMO.  To this, I note that the Defendant did not intend to appeal against my finding in paragraph 37 of my judgment, nor have I seen any evidence to contradict this common sense, that “[the air-conditioning system and the fire services system in the Premises] would benefit the Premises only but not other parts of the building”.  While the air-conditioning system and the fire services system in the Premises were connected to a centralised systems, it is a non sequitur, and there was no evidence to suggest, that the systems in the Premises were used in connection with the “enjoyment” of any other flats in the Building.  The farthest Mr Ho went was that the operation of the systems in the Premises, being part of the centralised systems, would affect the other parts of the centralised systems.  However, this still does not follow that the systems in the Premises were used in connection with the enjoyment of any other flats.  Along the same line, Mr Ho also submitted that as part of a centralised system, the system in the Premises should be regarded as common parts as a matter of common sense.  This begs the question of how the Tenancy Agreement should be interpreted, given that the BMO serves only a starting point only.

5.  Indeed, when reading paragraph 11 of Schedule 1 together with paragraph 10 thereof, the common thread in Schedule 1 would become clear – the common parts were for the use, benefit and/or enjoyment of some other owners as well.  Paragraph 11 of Schedule 1 is a catch-all provision.  Under this common thread, for example, a flush water supply pipe in a flat to the toilet in that flat is connected to the whole water supply system of the Building, but no one would say that water pipe is a common part.  Of course, the use of the flush water supply pipe may be regulated to a certain extent, for example, that pipe could not be connected to the drinking water pipe at the risk of having the flush water flowing into the drinking water pipe.  That is another matter. If mere connection would be sufficient, put to extreme, given that every flat was connected to other flats or common areas, then the flat would also be regarded as a common part.  This is, as I observed in paragraph 39 of my judgment, absurd.

6.  Point (4) argued that nothing in the Tenancy Agreement indicated anything contrary to the definition to the BMO in respect of “common area” or “common parts”, and Clauses (15) and (27) of the Tenancy Agreement (referred to in paragraphs 37-38 in my judgment) merely allocated responsibilities between the landlord and the tenant in respect of the air-conditioning system and the fire services system in the Premises.  For convenience, I quote these two clauses again:-

“(15) Where any plant machinery or equipment for cooling or circulating air is installed in or about the Premises (whether by the Landlord or the Tenant) the Tenant will to the extent of the Tenant’s control over the same at all times use and regulate the same to ensure that the air-conditioning system is employed to its best advantage in the conditions from time to time prevailing and without prejudice to the generality of the foregoing will operate and maintain such air-conditioning controls and outlets within the Premises as the Landlord may reasonably determine to ensure a reasonably uniform standard of air cooling or conditioning throughout the Building.

(27) To obey and comply with all ordinances, regulations, by-law and requirements of any Government or other competent authority regarding fire safety measures relating to… (b) the apparatus and fittings including the sprinkler heads installed inside the Premises and to indemnify the Landlord against the consequences of a breach of this provision.” (emphases added)

7.  Indeed, Clauses (15) and (27) allocated the responsibilities.  But the way the two clauses allocated the responsibilities demonstrates that the air-conditioning system and the fire services system in the Premises were under the exclusive possession of the Plaintiff.  This is because Clauses (15) and (27) were to limit what the Plaintiff could do in respect of the systems instead of the Defendant authorising the Plaintiff to do certain things.  This must imply that the systems in the Premises, together with the Premises, were tenanted to the Plaintiff’s exclusive possession.  Otherwise, Clauses (15) and (27) would not be framed in such restrictive way.  I also repeat my flush water supply pipe example in paragraph 5 above – owners were not allowed to connect the supply pipe to drinking water supply pipe.

8.  Point (5) argued, in gist, that I wrongly equated the Plaintiff’s certain degree of control over the systems with the Plaintiff’s exclusive possession. Of course a certain degree of control does not amount to any exclusive possession.  It is clear in paragraph 38 of my judgment that I mentioned this “certain degree of control” as one of the many considerations I had for saying that the Plaintiff had exclusive possession.

9.  Point (5) also raised another point, which was linked to point (6). That is, I asked the wrong question in paragraph 38 of my judgment of whether the Defendant had retained exclusive possession of the systems, and in fact, it was never the Defendant’s case that it had such possession.  In this regard, I refer to the footnote put in parenthesis to the end of paragraph 12 of my judgment:-

“A footnote must be put here that “common parts” or “common areas” here are strictly speaking the parts and areas reserved to the sole registered owner of the whole building. For convenience sake and consistent with the Tenancy Agreement, I shall still use expressions “common parts” or “common areas””

10.  There was no Deed of Mutual Covenant.  The Tenancy Agreement did not carve out any common parts of common areas.  Nor did it stipulate what parts of the Building the Defendant as owner and landlord of the whole Building would license or permit the tenants to use and how.  In this peculiar context, absent any suggestion that the landlord and the tenant would have joint exclusive possession over certain parts of the Building, logically, it would be either the landlord or the tenant who had exclusive possession of the parts of the Building in question.    In paragraph 38 of my judgment, by reductio ad absurdum, I found that the Defendant did not retain the exclusive possession of the systems in the Premises.

11.  In the circumstances, I see neither real prospects of success in the appeal nor any reason for interests of justice in respect of Ground 1. 

Ground 2

12.  Before I proceed to deal with the points under Ground 2, one must read my judgment bearing in mind that for convenience sake, I adopted the definition of “Reinstatement Deposit” and “Reinstatement Charges” as adopted by the parties.  The Reinstatement Charges, which would be non-refundable, covered the air-conditioning system and the fire services system in the Premises, which I found to be parts of the Premises.  Thus, more precisely, those “Reinstatement Charges”, being charges for the renovation works on the Premises, should be part of the “Reinstatement Deposit” under Clause (1)(c) of Section V of the Tenancy Agreement, which should be refundable.  However, to be consistent, I adopted the same definition throughout my judgment (and here), but this does not mean that I found that the “Reinstatement Charges” in respect of the air-conditioning system and the fire services system in the Premises fell outside Clause (1)(c).  On the contrary, following from my finding that the two systems were part of the Premises, they did fall within Clause (1)(c).

13.  Point (1) under Ground 2 just set out the express term of the Tenancy Agreement that the Plaintiff shall not make any alterations to or renovations in respect of the Premises, except with the Defendant’s prior approval.  I of course do not have any problem with this point.

14.  Point (2) argued that I did not explain how the charging of a non-refundable Reinstatement Charge would constitute any breach of the implied terms found by me in paragraph 54 of my judgment.  The implied terms I found were set out in paragraph 45 of my judgment, namely:-

(1)   The Defendant should not unreasonably withhold consent to the commencement of decoration works proposed by the Plaintiff (“implied term (1)”); and

(2)   The Reinstatement Deposit or Reinstatement Charges should be reasonable (“implied term (2)”).

15.  As I explained in paragraphs 32 and 54 of my judgment, in summary:-

(1)   The air-conditioning system and the fire services system in the Premises were not common parts but parts of the Premises.

(2)   For works on any parts of the Premises, the Reinstatement Charges would be regulated by the Tenancy Agreement.

(3)   By Clause (1)(c) of Section V of the Tenancy Agreement, the Defendant may charge refundable Reinstatement Deposit in respect of works carried out on any parts of the Premises.

(4)   Thus, if the Defendant demanded a non-refundable Reinstatement Charges in respect of any parts of the Premises, and made it clear that it would withhold consent if such charges were not paid, it was unreasonable, and thus the implied term was breached.

16.  Point (3) argued that merely asking for the non-refundable Reinstatement Charges does not mean that the Defendant unreasonably withheld consent contrary to implied term (1).  However, it was not in dispute, as I set out in paragraphs 25-26 of my judgment, that:-

“25. On or around 28 February 2015, the plaintiff’s Contractor, without payment of any reinstatement deposit and/or reinstatement charge, demolished the ceiling and at least part of the wall partitioning the Premises.  Thus, on 3 March 2015, the defendant’s solicitors issued a demand letter for the payment of the reinstatement deposit of HK$60,000 to the defendant and the reinstatement charge of HK$136,000 to the Management Company.  Further, on 4 March 2015, in response to the plaintiff’s Contractor’s enquiry of when they could commence work, the Management Company emailed the plaintiff’s Contractor reiterating “the pre-condition of our granting of the consents for the works by paying the reinstatement deposit and reinstatement charge to Landlord and Management Company respectively.

26. On 9 March 2015, having received no such payments, the defendant’s solicitors issued a letter to re-enter on the Premises and to terminate the Tenancy Agreement.  On the same day, the plaintiff’s solicitors replied that because the defendant had unreasonably failed and/or refused to give the consent for the relevant renovation works and the defendant had asked the plaintiff to pay reinstatement charges which were unreasonable and grossly excessive, the defendant had repudiated the Tenancy and the plaintiff accepted the repudiation.  The plaintiff further demanded return of all money and/or deposits paid to the defendant.”

17.  Thus, it is clear that the Defendant did not just merely ask for the Reinstatement Charges and if these were not paid, the Defendant would still give the approval in respect of the air-conditioning system and the fire services system in the Premises.  On the contrary, holding the view that the two systems were common parts, the Defendant simply did not give any approval to the works thereon without any payment of non-refundable Reinstatement Charges.

18.  Point (4) argued that demanding for non-refundable charges was not unreasonable, contending that:-

“The only real difference between the non-refundable Reinstatement Charges and refundable Reinstatement Deposit is that the former operated as a liquidated sum of money charged for the reinstatement works – in which case the Defendant landlord will bear any excess in reinstatement costs; whereas for that latter, if there was any fund remaining after the reinstatement works were done, those sums would be refunded to the Plaintiff.”

19.  Point (4), however, did not mention the converse, namely, for the non-refundable Reinstatement Charges, if the Defendant landlord actually did not spend so much, the Defendant would still be entitled to keep it, by the very nature of its non-refundability.  Mr Ho argued that since I found the quanta of the deposits and charges “not excessive or not so excessive to be unreasonable” in paragraphs 53 and 54 of my judgment, this converse situation would not happen.  To avoid any doubt, I state the obvious – being “not excessive or not so excessive to be unreasonable” means that there would still be chances that the levied deposits and charges would still be higher (though not excessively) than the actual amounts.

20.  More importantly, Clause (1)(c) of Section V of the Tenancy Agreement only prescribed refundable deposits.  In the circumstances, I cannot see how I could be faulted in finding in paragraph 54 of my judgment that the Defendant breached implied terms by demanding a non-refundable charge in respect of the parts of the Premises for which the Tenancy Agreement only prescribed refundable deposit but not non-refundable charges.

21.  Point (5) was an argument following from Point (4), that given my finding that the amount was not excessive, there was no basis for me to find breach of the implied terms.  In determining whether the charges were reasonable or not, I looked not only at the amount but also its nature.  I repeat paragraphs 12 and 15 above.

22.  Point (6) boldly argued that given that Clause (1)(c) of Section V of the Tenancy Agreement did not prohibit the Defendant from levying non-refundable charges, I was wrong in holding that demanding non-refundable charges was contrary to Clause (1)(c) of Section V.  First, I repeat paragraph 12 above.  Second, I think the ultimate question is whether, given Clause (1)(c) of Section V allowing charging refundable deposits only, the demand for non-refundable charges was reasonable or not.  I answered in the negative, and I see no reason why this answer was incorrect.

23.  Lastly, for Ground 2, at the hearing, Mr Ho raised a pleading point, which is not in the draft notice of appeal.  He contended that in the pleadings, the Plaintiff never pleaded that the non-refundability of the Reinstatement Charges constituted any unreasonableness in, and thus breach of, the implied terms.  He contended that in the whole pleadings, the only issue between the parties about the reasonableness was the quanta.  Thus, he contended that I should not make any finding outside the scope of dispute that the non-refundability of the Reinstatement Charges in itself constituted breach of the implied terms.

24.  I reject these contentions.  First, there is no dispute that it was always a live issue, as appeared from the pleadings (see paragraph 10(l) of the Amended Defence; and paragraph 7(f) of the Reply) and the Defendant’s opening submissions (paragraphs 12-14), whether the systems in the Premises were common parts or not.  In fact, this point was first raised by the Defendant itself in paragraph 10(l) of the Amended Defence, apparently because, as shown in the pre-action correspondence pleaded in paragraph 10 of the Amended Defence, the parties had already disputed this issue in relation to whether the Defendant could levy a non-refundable charge.  Second, the pleadings did not just refer to the excessiveness of the Reinstatement Charges, but also the reasonableness (see paragraphs 6(b) and (c) and 8(a) of the Statement of Claim).  Third, it must follow, as already explained in paragraph 15 above, that if the systems were not common parts but parts of the Premises, withholding of approval on the ground that the Plaintiff refused to pay the non-refundable Reinstatement Charges, contrary to Clause (1)(c) of Section V, was unreasonable.  This must have been clear to the parties since the beginning the whole action as appeared from the pleadings.  If this were not so, there would simply be no point in raising and arguing the issue of whether or not the systems were common parts or parts of the Premises. 

25.  To this third point, in line of Point (6) of Ground 2 of the draft notice of appeal, Mr Ho argued that there would be other factors I would have to consider in determining the reasonableness.  He went so far as to say that there would not be breach of Clause (1)(c) of Section V (and thus there would still be reasonable) when the Defendant demanded HK$1 as a non-refundable reinstatement charge for work done on the Premises governed by the Tenancy Agreement (as opposed to common parts not governed by the Tenancy Agreement). I cannot accept this argument.  If the parties agreed that the subject premises would be regulated in a certain way, at least in this case, I cannot see how even a nominal figure would allay the unreasonableness in acting contrary to a contractual term to such an extent that it would no longer be unreasonable. 

26.  In the circumstances, I see neither real prospects of success in the appeal nor any reason for interests of justice in respect of Ground 2 (including the additional pleading point raised orally at the hearing).

Conclusion

27.  I thus dismiss the Defendant’s application with costs to the Plaintiff with certificate for one counsel, to be taxed if not agreed.